The Eurosystem’s initiative on wholesale settlement in central bank money is gaining momentum. As financial markets increasingly adopt Distributed Ledger Technology (DLT) for transaction settlement, the Eurosystem, the European Union body comprising the ECB and the central banks of eurozone member states, is accelerating its efforts on a central bank digital currency (CBDC), with Luxembourg playing a significant role. After an exploration phase conducted over several months during 2024, the Governing Council of the ECB has decided to extend the initiative aimed at settling transactions recorded via DLT using wholesale central bank digital currency (wCBDC).
In its decision, the Eurosystem has defined a two-pronged approach: implementing a safe and efficient platform for wCBDC settlement through an interoperability mechanism between market DLT platforms and TARGET Services (the real-time interbank payment system for EU banks), while also studying a more integrated long-term solution for central bank money settlement of DLT-based wholesale transactions.
Through TARGET services, the Eurosystem central banks have been offering digital settlement of interbank transactions for more than 25 years. But a recent development is the financial sector’s growing interest in using DLT to settle wholesale financial transactions, driven by the promise of significant efficiency gains. Various pieces of legislation have been implemented to ensure legal certainty of DLT-based financial activities at European level (DLT pilot regime and MiCA regulation) or the national level (for example, the set of four blockchain laws in Luxembourg), which has allowed regulated entities to develop DLT-based financial market infrastructures.
“Many actors therefore turned to central banks to request the establishment of a central bank money settlement solution compatible with DLT.”
“It was then observed that in the case of cash settlement activities on these platforms, no efficient, safe and stable euro cash solution was available to support those activities. Many actors therefore turned to central banks to request the establishment of a central bank money settlement solution compatible with DLT,” explains Nicolas Weber, member of the executive board of the Banque centrale du Luxembourg.
Key players in Luxembourg
It is therefore with the aim of establishing a wholesale digital euro solution compatible with the DLT platforms developed by the market that the Eurosystem launched two waves of large-scale experiments between May and November 2024. These experiments brought together 64 participants (central banks, financial market players, and DLT operators), who processed more than 200 transactions for a total value of 1.59 billion euros. The transactions covered a broad spectrum of both securities-related (for example the primary issuance of bonds and settlement with delivery-versus-payment) and payment-related (for example cross-currency payment-versus-payment transactions with another central bank) use cases.
The initiative involved key Luxembourg-based operators, who have drawn significant insights from their participation. For the Luxembourg Bankers’ Association (ABBL), which has a dedicated working group on tokenisation that brings together around forty players from the Luxembourg ecosystem, the participation of Luxembourg actors was truly strategic.
This is the case for Clearstream, Luxembourg-based leading international central securities depository (CSD) and subsidiary of Deutsche Börse, which was involved as a DLT market operator through its three CSD entities – Clearstream Banking Luxembourg, Clearstream Banking Frankfurt, and LuxCSD. The Luxembourg entity put its D7 digital post-trade platform at the service of this exploratory phase, for which it developed a private blockchain so that its clients could access a DLT platform.
“We participated in both test waves, and this exercise was a resounding success. It demonstrated the possibility of managing securities delivery versus payment operations on a blockchain, which increases speed, improves operational efficiency, reduces costs and risks,” comments Thilo Derenbach, Director of Business Development for Digital Securities Services at Clearstream.
The future in the blockchain technology
For Clearstream’s operation manager, central bank money is the safest means of making payments with very low counterparty risk. “It was therefore very important to experiment with its use on-chain, and an important step towards wider adoption of blockchain technology for the financial industry.” Its CSDs assessed no fewer than ten different use cases using all three different payment solutions provided by the Banque de France, the Deutsche Bundesbank, and the Banca d’Italia. “All three solutions worked very well. We don’t need further trials. The next step is to transition into a permanent state of cash-on-chain wholesale central bank money,” Derenbach added.
“We don't need further trials. The next step is to transition into a permanent state of cash-on-chain wholesale central bank money.”
Clearstream was not the only Luxembourg-based actor to contribute to the ECB’s pilot programme. Among the operations in which it took part, one also involved the Luxembourg bank Spuerkeess which, as a state bank, felt it should set an example. The experiment (without real money exchange) comprised of the issuance of a bond by the European Investment Bank (EIB) on Clearstream’s D7 platform. For this test, which took place in November 2024, Spuerkeess and the UK bank NatWest played the role of investors.
“The objective of this test was particularly to guarantee that the security changes ownership at the same time as the cash changes hands on a blockchain. This allows automatic reconciliation and guarantees that no one runs any risk,” notes Christophe Medinger, Deputy Head of Business Unit Digitalisation at Spuerkeess.
“The objective of this test was particularly to guarantee that the security changes ownership at the same time as the cash changes hands on a blockchain.”
HSBC Continental Europe, Luxembourg also played a key role as a DLT market operator through its international digital asset platform HSBC Orion, which was established in February 2023 in Luxembourg taking full advantage of Luxembourg’s pioneering blockchain legislation. The use case comprised the issuance of a €100 million digital bond by the EIB on HSBC Orion. It was settled using the wholesale CBDC on the Banque de France’s DL3S platform.
“This operation demonstrated the interoperability between the two platforms. Investors paid for the digital bonds in euros, while the proceeds from the issuance were delivered to the EIB in EUR wholesale CBDC, by using Banque de France’s solution,” explain Emanuele Vignoli, CEO of HSBC in Luxembourg and Guglielmo Manzoni, Head of Depositary and Fiduciary Services.
“This operation demonstrated the interoperability between the two platforms.”
Reduction of settlement time
Also convinced of the need for a wCBDC, which offers “a risk-free settlement mechanism to support digital transactions and mitigate potential risks arising from reliance on tokenised forms of money backed by the private sector,” Vignoli and Manzoni perceive four major positive benefits from last year’s exploratory phase:
– Evaluate how wholesale euro CBDC can reduce settlement times, including for cross-border transactions
– Ensure regulatory implications align with existing frameworks
– Establish integration with existing systems and interoperability across distributed ledgers
– Implement adequate legal and governance structures around wholesale CBDCs
The Banque centrale du Luxembourg supported and coordinated all use cases involving a Luxembourg-based component, including the issuance of the digital EIB bond, as it deems it important to facilitate the continued use of euro central bank money in the emerging digital wholesale markets
For the Banque centrale du Luxembourg, also involved in the issuance of the digital EIB bond, facilitating the continued use of euro central bank money as a settlement asset in digital wholesale markets would maintain its monetary anchor function while simultaneously supporting increased use of DLT in European capital markets.
“Thereby, the Eurosystem continues promoting a strong, stable and integrated European payments ecosystem, while at the same time contributing to fostering the Savings and Investments Union, safeguarding strategic autonomy and promoting the international role of the euro,” specifies Nicolas Weber.
Looking ahead, the insights from the two waves of explorations indicate that a eurozone-wide wholesale CBDC could become a reality well before 2030. The financial sector is expected to benefit from increased efficiency and reduced operational costs thanks to the application of DLT. The Luxembourg-based participants involved in the 2024 Eurosystem exploratory work are aligned in their view that wholesale CBDC should be operational long before a retail digital euro becomes widely available to citizens.